Why companies are moving out of China?
What made companies do this after thirty five years of business in China? Why they think that china is a problem for them? What countries are the companies moving towards.
Well, thats what I will be telling you in this story.
China, as we all know is the manufacturing hub of the world. But now many companies are moving out, here’s the reasons:
Reason 1 :- Trade War between US and China
Trade war started in 2018 when US imposed tariff of 25% on Chinese goods. Basically, US accused China as they were importing only $100 billion worth of goods, on the other hand US was importing $500 billion worth of goods from China.
Yet trade was not just an import and export thing but US has also accused China for not playing fair.
Chinese government treats Chinese companies differently as if they have better access to the markets than any other western competitors and sometimes Chinese companies get lands free of cost plus they have very low tax.
These factors make western companies hard to compete with Chinese competitors. US also accused China for stealing their technology. From defence sector to the electronic and telecommunication equipment, China has copied or reverse-engineered a lot of western products and technologies.
Also Chines companies(Huawei) were caught spying on US communications network. This as regarded as a threat to the whole nation. So the US government in pressurising their companies to move out of China.
Reason 2 :- Global Supply Chain Disruption
Many countries are dependant on China for supply of goods. Due to the recent lockdown in China to control the Covid-19 pandemic different products from the markets have wiped out completely. China is also number one country for manufacturing pharmaceutical medicine and equipment yet in this pandemic China is not able to fulfil the demand.
So this has made other countries think and change their mind about dependency on one country for goods. Recently Japanese government offered Japanese companies a 2.2 billion package to move out of China.
Reason 3 :- Increase in Labour Cost
Three or four decades ago, Chinese labour were one of the cheapest workforce in the world. It was about $150/year. But now it has tremendously increased to $14000/year and that is a massive multiplication.
This makes manufacturing more expensive in China. Due to this companies cannot make profits as they were making in the past. This made them think of relocating their manufacturing facilities.
Also in 2016 China saw a decrease in manufacturing output for the first time in history. Companies like Samsung and apple are slowly shifting their manufacturing plants to India.
Reason 4:- China’s Aggressiveness
As china has grown to the second largest economy in the world, they have also grown their regional military power. Recently China had a conflict with Vietnam, Malaysia, Brunei and Philippines in the South China Sea as the sea is strategically important to China since their 30 percent of world trade goes through this region and it has been estimated that this region consist of a 11 billion barrels of oil and 190 trillion feet of natural gas.
This shows how China is putting pressure on small countries using their military power. Also China is using its economic power to grab the African markets for natural resources.
Countries like Zambia, Djibouti and Congo are facing big challenges to pay back Chinese debt. Sri-Lanka failed to pay back their debt, so they leased their Hambantota port to China for 99 years. Internationally this is called as debt trap diplomacy.
US, Japan, South Korea and the European countries are thinking to move their facilities out from China. Also some economist says that 20 years from now China will not be the only manufacturing giant in the world.
Where are the manufacturers moving from China?
China claims that they have stopped the spread of Covid-19. After the intense lockdown Chinese manufacturing sector has started to reopen but after this pandemic China’s manufacturing sector will not be the same as it was before.
In the recent Covid-19 pandemic companies got to know that they cannot depend on one supplier for their products. Also governments across the globe are encouraging their companies to move out of China.
So the companies are starting to consider countries like India, Vietnam, Indonesia and Mexico.
The investors always thought that Vietnam is the best for manufacturing due to its low labour costs but there is a country which has been driving a lot of attention lately and that is India.
India has a bunch of reasons why investors could be looking forward to it for manufacturing.
Why investors chose India?
Reason 1 :- Low Labour Cost
This is one of the major reason behind companies moving into India. The average wage for an Indian labour is between $70 to $200 a month. So it is significantly cheaper to manufacture any product in india compared to China.
Reason 2 :- Low Taxes
Two years back the corporate tax in India was cut down to 22% from 30% and for new manufacturers it is 15% from 25%.
From back then this is the lowest corporate tax in South Asian region. Right now also implementation of GST and tax collection makes easier for companies to pay their taxes. All these reforms attracts more investors to India.
Reason 3 :- India’s Huge Market
India has the second largest population in the world. Even if you sell your product to 5% of people in this country, it will be more than the entire population of most of the countries.
Also if the companies manufacture products outside of india they have to pay extra for export taxes and transportation.
Reason 4 :- Democracy
India is a democratic country so most of the western companies can easily adapt themselves for Indian markets.
Also the law and order in India makes the companies feel more secure since they can sue the government itself incase of dispute. So they feel more secure in india than in China or Vietnam.
Reason 5 :- India’s Growth in The past Years
India is the fifth largest economy in the world and has lifted more than 300 million people out of poverty in the last 18 years.
Unlike China India’s growth did not come from manufacturing industries but from service based industries like IT, banking and retail. But in the last couple of years, manufacturing sector of India has grown significantly. According to some sources India’s manufacturing is growing in the pace of 8% per year.
There are many reasons why India can be the next manufacturing hub but along with that India has some problems.They need to work on these problems, because of it `many companies around the world are concerned.
What’s stopping them from coming in?
Problem 1 :- Poor Infrastructure
Though India is working on its infrastructure, it is not as good as China or even Vietnam. Companies in China were established decades ago also they have good access of global supply chain in China.
Problem 2 :- Ease of Doing Business
If companies want to open manufacturing in India they have to go through 12 different procedures and this also requires 27 days. Also the corruption in India has been a major concern for multinational companies from a long time.
Reason 3 :- Currency
India’s Currency rupee is very volatile because of free-floating currency but countries like Vietnam have more stable currency because of the crawling peg system. That means $1 in Vietnam does not change suddenly and this is beneficial for companies.
Problem 4 :- Political Issues
Building an exclusive economic zone or a manufacturing plant to attract companies requires a large amount of land. And during acquisition many opposition’s can be made. This can become a political issue. So this kind of thing is also a big issue for companies.
But from last couple of years, government is taking some actions to solve these problems. Also India is changing its policies to attract companies and boost the economy. The Make in India initiative has also attracted many foreign investors to India. Yet the Indian government is ready to give complete support for companies that are planning to move into India.
So this can be the opportunity for India to become the next big manufacturing hub.